Oiling the slump
With Arab economies already suffering from protracted decline in growth rates, the US occupation of Iraqi promises to push them into an even worse slump. Wael Gamal examines 'the oil factor'
Structural weaknesses are keeping the Arab economies back. This is the main message of a new report by the Arab Monetary Fund. Macroeconomic performance, growth and investment are declining and this will require a quick legislative and policy response. In addition, the consequences of the occupation in Iraq are likely to exacerbate the problem.
The report observed declining growth rates in the region with "the average not exceeding 3.3 per cent per year in the last three decades, compared to a six per cent growth rate in South East Asia," The report went on to say, this is "despite the fact that higher growth in the population necessitates higher economic growth."
Arab economies play a marginal role in the international economy -- where the total GNP of Arab economies in 2001 accounted for only two per cent of the world GNP. The Arab contribution to international trade stood at less than three per cent or $400 billion. The Arab region's total market capitalisation is $200 billion while South Korea alone has a market capitalisation of $253 billion.
In the last three years, there has been a gradual downward trend in growth in the Arab region. In 2000, the growth rate was 4.2 per cent, declining to 3.2 per cent in 2001 and falling to 2.5 per cent in 2002. The World Bank's forecast for 2003, excluding the effects of war, was merely 3.5 per cent.
As the unemployment level increases, it becomes increasingly important to improve growth rates since "unemployment will lead to greater social and political crises," the report stated.
In addition "there was not enough investment during the previous years due to a failure to attract foreign capital. Consequently, there was a need to depend on public expenditure which reached more than 40 per cent of GNP in some Arab countries -- a very high rate compared to international levels," the report said. The share of investment in public expenditure is also very small -- "not more than 10 to 15 per cent" -- and most of it goes to wages and subsidies.
The report criticised "the bloated public sector in Arab countries and its greater domination of economic activity -- which reduced the growth of both national and foreign private sector investments".
The report insisted that monetary policy has not yet played a major role in most Arab economies. "This is primarily due to two factors. Firstly, central banks lack independence and are always subordinated to finance ministries. Secondly, there is the problem of a fixed exchange rate applied in most Arab countries," the report said.
The report pointed out the need to diversify production bases and income sources, stressing that the dependence of Arab economies on certain commodities like oil makes them vulnerable to economic shocks and impedes the development of trade between Arab countries.
In this regard, the vulnerability to the effects of war in Iraq will add to the gloomy outlook. Experts say the effects of the oil factor are enormous. "Every one US dollar drop in oil prices will cost Arab economies a $6 billion loss in exports annually. To date, prices have declined by nearly $16, from $39 to around $23. It will drop further once sanctions on Iraq are lifted by a range of 15-18 per cent," says Ahmed El-Naggar, an expert at Al-Ahram Centre for Political and Strategic Studies.
"The American occupation of Iraq means that the Americans, by directly dominating the Iraqi reserves -- the biggest in the world by American estimations -- will take on the role historically played by Saudi Arabia, which is to guarantee market prices. The Saudis' economic problems changed the trend towards low oil prices after 1998. This forced the Americans to take it into their hands," El-Naggar added.
According to El-Naggar, the effects will be most severe for Saudi Arabia. Oil revenues constitutes between 90 to 95 per cent of its exports and between 70 to 80 per cent of total state revenues and around 40 per cent of its GNP. The effects of deteriorating oil prices were already being felt before the war, he said. The per capita share of oil exports in Saudi Arabia, adjusted for inflation, declined from $23,820 in 1980 to $2,636 in 2001. This meant that the GNP shrank by the rate of 33.3 per cent in the period 1980-2000. Except for the year 2000, which witnessed high oil prices, the Saudi budget is suffering a painful deficit, El- Naggar says.
But it is not only oil. El-Naggar pointed to tourism and foreign investments also suffering from the US presence in Iraq. "Such an unstable political environment will surely be discouraging for foreign investments," he added.
Al-Ahram Weekly Online : 5 -11 June 2003 (Issue No. 641)
Located at: http://weekly.ahram.org.eg/2003/641/ec2.htm